How Is NAV Calculated?

How is NAV calculated? The NAV is calculated daily by taking the funds total assets: securities, cash and any accrued earnings, deducting liabilities, and dividing the remainder by the number of shares outstanding.

Before you start investing, it is important to learn enough about mutual funds to ask the right questions. One important term is the mutual fund's net asset value or NAV. The NAV is "the current market worth of a mutual fund share," according to Michelle Smith and the Mutual Fund Education Alliance. The NAV is "calculated daily by taking the funds total assets: securities, cash and any accrued earnings, deducting liabilities, and dividing the remainder by the number of shares outstanding," says Smith and MFEA.


Let us go into a more in-depth explanation of how the net asset value is actually calculated. Total assets are actually a summation of various items of economic value held by the company. Current assets are items that include cash, cash equivalents, accounts receivable, inventory and other items that can be converted to cash in under one year. This number is important because if the company goes bankrupt, they can be sold to pay off debts and shareholders.




Long-term assets are part of the total. They include items such as machinery and office items that can be used for more than one year. The items are depreciated though. Physical property, for whatever reason, that cannot be converted to cash in under a year is referred to as capital assets. Intangible assets are also included in the total assets figure. Items such as patents, copyrights and trademarks are intangibles.

As part of the total assets, any liabilities the company has are subtracted. A liability is a legally binding obligation to repay a debt in whatever manner is appropriate. A current liability on the balance sheet is any debt that can be paid off in under a year. Long-term debts are those they have a longer payoff period. Taxes, expenses and wages are some examples of liabilities a company may be carrying.

An outstanding share is something that is in existence. These securities are in investors hands. Most mutual funds have an unlimited amount of shares and they sell and buy them as needed. The net asset value (NAV) is required to be calculated daily. They tend to wait until the end of the business day after the market has closed before performing the calculation.

It is important not to judge how your mutual fund is doing by checking the NAV in the morning newspaper. Items such as mutual fund distributions can throw off the NAV, but it does not mean that the investor has lost money. These distributions are "payments of dividends and/or capital gains by a mutual fund," according to Michelle Smith and the MFEA. Mutual funds are forced by law to distribute at least 90% of the realized capital gains and dividend income on a yearly basis.

Do not overlook any purchase fees that may need to be paid such as sales loads. These fees are deducted from the net asset value (NAV) before an investor is paid for the redemption of the shares. If the fund takes a loss for the year, the fund manager usually subtracts the losses before the money, if any, is distributed.

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